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PROBLEM 19.3A

Target Costing

Meiger Mining, Inc., has just discovered two new mining sites for iron ore. Geologists and engineers have come up with the estimates on the following page regarding costs and ore yields if the mines are opened.

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Site A Site B Variable extraction costs per ton $3.80 $4.00 Fixed costs over the life of the mine: Blasting $150,000 $185,000 Construction 225,000 240,000 Maintenance 25,000 20,000 Restoration costs 40,000 35,000 Total fixed costs $440,000 $480,000 Total tons of ore that can be extracted over the life of the mine: 200,000 160,000 Meiger's owners currently demand a return of 20 percent of the market price of iron ore.

Instructions

If the current market price of iron ore is $8 per ton, what is Meiger's target cost per ton?

Given the $8 market price, should either of the mines be opened?

The engineer working on Site B believes that if a custom conveyor system is installed, the variable extraction cost could be reduced to $3 per ton. The purchase price of the system is $25,000, but the costs to restore the site will increase to $45,000 if it is installed. Given the current $8 market price, should Meiger install the conveyor and open Site B?